The greatest drawback for a buyer when making a purchase through a bank short sale process is the amount of time that can pass between the offer and contract with the homeowner and the final approval of the sale by the mortgage lender(s). The reason for the long delay is that the lender must give approval for the sale, and this approval requires that the lender consider a number of issues.
First, the lender must agree to the short sale itself. Remember, the very definition of a short sale is that the homeowner is going to get less money when he sells the property than the amount of his mortgage debt. There has to be a reason for the lender to agree to accept this deficiency, and the first step in the lender’s evaluation process is to determine if the homeowner has a reason that the lender approves of for selling his home at a loss. There are many reasons that are acceptable to a lender, and most of them can be bundled into the category of financial hardship as noted above.
Second, the lender must evaluate the terms of the Contract of Sale signed between the homeowner and an independent third party buyer. This evaluation requires that the lender determine the market value of the homeowner’s property against the contract price, the timing of settlement, the financial status of the buyer, and any other terms of the Contract that could affect the overall value to the lender. While this process is not unlike that of a standard sale, which is accomplished by the parties in less than forty-five days, for a lender overloaded with similar short sales, this process can drag on for months.
Finally, there are some of the standard time frames of a normal sale that must be added to the process after the lender has given its approval to the Contract. Remember, the buyer still has to get loan approval and the property has to be appraised by the new buyer’s lender. While most short sales are “As Is” and there will be no repairs made by the homeowner or his lender, the Contract may allow for an independent inspection of the property by the buyer for his information only, and this may be a factor in the time to closing.
Any buyer entering into a short sale should be aware of this potential delay and be prepared to submit any Addenda that their Agent suggests are necessary to keep the Contract valid over time. At the same time, a buyer in a short sale should understand that the Contract that they signed with the homeowner is not complete until the lender gives its third-party approval, and therefore the buyer can generally cancel the contract until such approval is granted.